Last year was a tough one for investors, as the S&P 500 and Nasdaq Composite indexes posted huge declines. This year, however, has been a fantastic turnaround story, as both benchmarks are up double digits as of Aug. 14.
But not all companies have benefited from the rally. Payments software and hardware provider Block (SQ +0.40%) has seen its shares fall 5% so far in 2023. And they remain 79% below their all-time high price.
Is Block stock a buy right now? Let's take a closer look at this fintech business.
Solid momentum
In the most recent quarter (Q2 2023 ended June 30), Block reported strong growth across the enterprise. Gross profit at merchant-focused Square was up 18% year over year, while growth of 37% at Cash App was even better.
The bottom line is showing signs of improvement. Block's operating loss shrunk meaningfully from $214 million in the 2022 second quarter to $132 million in the latest three-month period. Like many tech businesses, Block has emphasized trying to cut costs across the organization. Management is pulling back its hiring plans and has reduced office space.
"We also continue to improve our cost structure for each of the ecosystems by identifying opportunities to expand our structural margins," CEO Jack Dorsey mentioned on the Q2 2023 earnings call.
Block raised its full-year guidance for adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to $1.5 billion, up from $1.36 billion.
NYSE: SQ
Key Data Points
Competitive advantages
Investors might appreciate Block's competitive advantages. The Square segment benefits from switching costs. As merchants come to depend on Square as a mission-critical service provider that helps them handle all things related to payments and operations, they'll be less inclined to switch to competing providers. In fact, a growing chunk of Square's gross profit is coming from customers that use more than four different products or services. Driven by greater penetration, that stickiness has been key to the company's success.
Cash App also benefits from switching costs in some respects. Someone who has their paychecks set up for direct deposit on the personal finance app is probably using other services, such as by sending money to friends or buying stocks. As more financial needs are handled by Cash App, there could be less of a need to go elsewhere. Management's ongoing strategy with Cash App is expanding the user base, now at 54 million monthly actives, increasing capital in-flows onto the platform, and boosting monetization.
Additionally, Cash App possesses powerful network effects. Someone who wants to get paid back by an existing Cash App user might have no choice but to sign up for the app in order to receive payment. As more people join the network, it becomes increasingly valuable to new customers.
Bitcoin catalyst
Dorsey hasn't been shy about his heightened interest in Bitcoin, saying, "I don't think there's anything more important in my lifetime to work on." He has spawned Bitcoin-related ventures under the Block umbrella so as to be at the forefront of any innovations regarding the top cryptocurrency.
Cash App has long provided Bitcoin brokerage services, collecting a tiny fee as users trade on the app. This has been a major headwind, as the price of Bitcoin remains well off its all-time high. But with the digital asset skyrocketing in 2023, investor interest could be a boon for Block's growth.
Moreover, Bitcoin is set to undergo a "halving" in April next year, when its inflation rate gets cut in half. This has usually resulted in bullish price action in the months before and after the event. If history is any indication, Bitcoin's gains could continue for the foreseeable future. And this could lead to revenue and gross profit growth as Cash App customers buy in.
Block is currently trading at a price-to-sales multiple of 1.8, which is extremely cheap by its historical standards. Investors should really consider adding the stock to their portfolios right now.
